Coordination and joint integration between Libyan monetary and fiscal policies in light of macroeconomic shocks during the period (1966-2022)

Abstract

Fiscal and monetary policy play an active role in achieving macroeconomic objectives of improving quality of life, achieving sustainable economic growth, stabilizing prices, combating inflation, reducing unemployment, and balancing the state budget. This requires achieving an optimal mix of complementary and supplementary fiscal and monetary policies, a mix that is able to respond effectively to various shocks, since the effective achievement of the objectives of the two policies requires effective coordination between the authorities concerned with monetary and fiscal affairs. In this context, this research aims to examine and diagnose the extent of mutual coordination between monetary and fiscal policies in Libya during the period (1966-2022). The research relied on the Set-Theoretic Approach. To test the cointegration between the two policies, a Granger causality test was conducted using the E-Views10 software application. To measure the extent of coordination between the various shocks to the growth rate and the inflation rate in the macroeconomic environment and the corresponding possible scenarios for the response of fiscal and monetary policies to the shocks, two matrices were constructed, the first called the macroeconomic environment matrix and the second called the policy response matrix. The main findings showed that the overall level of coordination was estimated at about 23%, and coordination prevailed in only 13 out of fifty-seven years, this coordination level indicates that only 23% of the basic preparations have been made by the relevant authorities to ensure coordination and joint integration between the decisions implemented by the fiscal and monetary authorities. This finding underscores the importance of fiscal and monetary authorities enhancing policy coordination to promote macroeconomic stability. The study proposed some recommendations related to the necessary adjustments to enhance coordination between the two policies so that they can perform their role better. This is achieved by strengthening the relationship between the monetary and fiscal authorities based on implementing an appropriate mix of policies that ensures the achievement of macroeconomic objectives.